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How High will the AUD Fly?

05 June 2020

Precious Metals Commentary

Gold continued to pull back in most currencies this week, but managed to remain above US$1,700, mainly on the back of some severe USD weakness. Silver briefly touched above US$18.00 before settling down to $17.70 at time of writing. The ratio sits at 96:1. 

We talked of expected AUD/USD strength in the last two updates, and after peaking very close to 70c we are starting to look a bit overbought now and at risk of correcting. Economic data released this week helped push the Aussie along to new recent highs, with our Current Account balance being $8.4 billion versus $6.3 billion expected, GDP contracting 0.3% for the quarter, and in comparison to the US data being worse than expected we see gold trading at the lowest point in AUD terms since mid-March.

A combination of escalating riots and negative economic data saw the USD Index sell off to 96.6.

$USD Index - Cash Settle Chart
If we take a close look at the AUD/USD we have seen the daily chart reach overbought levels on both the RSI and stochastic, so the rally may be looking a little stretched after gaining over 25% from the lows of 55c. A break through 70c could see more momentum, but gold and silver for local investors are looking much more attractive given the AUD strength. 

$AUD to USD Chart
A more long-term weekly chart of AUD Gold shows we are approaching an oversold level, which usually provides the best spots to dollar cost average in. In the chart below we have highlighted previous times Aussie gold was oversold and these areas consistently coincide with a low in the market before a recovery. The last time we were very oversold on a weekly chart was December 2019.

XAUAUD Chart
For a more detailed outlook for gold and silver and the Australian dollar, Nick Frappell has just released his monthly precious metals technical analysis report, which you can download here. Alternatively, watch Bron and Nick discuss metal markets in ABC Bullion’s 360 Monthly Review on YouTube, recorded yesterday.
 

Housing Handout

When initial reports surfaced that the Government was considering grants to homeowners for building work no doubt there were many people across the country looking forward to getting a free bathroom or kitchen renovation.

The announced plan dashed those hopes as it placed a minimum value of $150,000 for a renovation to qualify, along with other income and type of work restrictions. That at least shows that the Government hasn’t bought into the free money ideas of Modern Monetary Theory - for now.

To our mind we aren’t sure how much extra work this stimulus measure will create. Will an extra $25,000 really tip the scales for those considering a new home or renovation that would have been in the hundreds of thousands anyway?

Additionally, the large value threshold means the number of people impacted is limited. As Stephen Koukoulas noted, “just 0.3% of households will benefit from the government's renovation subsidies”.

What the home builder stimulus shows is the government’s desperation as they become aware of the longer-term impacts of the COVID lockdown.

Australia’s dwelling investment fell 2.9% in the March quarter and construction lobby groups are predicting that new dwelling commencements will decline by 50% by the end of 2020.

With construction accounting for around 8% of our GDP, 10% of Australia’s jobs and our banks heavily exposed to property, according to Selva Freigedo from The Daily Reckoning Australia, you can see why the government felt it had to do something specific for the construction industry beyond the JobKeeper.

Westpac’s Housing Consumer Sentiment Index shows a huge hit to buyer sentiment, posting its largest ever one month decline in April with readings pointing to a 40% slump in turnover.
The other factor weighing down housing is a forecasted drop in migration with Westpac seeing it halving over the next year and the Government expecting it to fall by 85%. That will lower Australia’s population growth and result in a drop in demand for new dwellings.

The chart below from Westpac shows that periods where population growth reduced dramatically coincided with high unemployment.

Population Growth: migration slowdown ahead chartIn terms of net number of people migrating, the chart below shows the extent of the drop but interestingly, this would only bring us back to the levels that existed prior to 2005.

Net Migration Flows By Major Category Chart
The significant increase in migration numbers since 2005 has helped boost Australia’s headline GDP as more people means more economic activity but as we have noted previously, what matters from a standard of living point of view is GDP per capita.

AMP Capital note the above factors as negatives for housing prices but say that Government stimulus and the earlier reopening of the economy mean that they see home prices only falling around 5-10%.

Capital City Home Prices Rolling Over.. Again Chart
They do see “measured” unemployment rising to around 8% once stimulus ends later this year and say it will take a long time for unemployment to fall back to the pre-COVID19 levels of around 5.2%.

However, they say that their worst-case scenario of a 20% decline in home prices or more could occur if there was “second wave” and a renewed shutdown.

For an indication of how effective the Government’s $25,000 housing grant will be we can look at the early superannuation withdrawal scheme, which allowed people to withdraw up to $20,000 in two lots.

The chart below from credit bureau illion and AlphaBeta found that “11% of the money paid out was used for gambling, with many people withdrawing funds under the scheme seemingly in no financial strife”.

What People spent their super on ChartEffectiveness: mixed. Misused: yes. Typical then for grand Government programs.
 

Gold Flows Reversing

Further evidence of a reversal in the usual flows of gold from West to East came out this week. Research firm Refinitiv published the chart below noting a dramatic shift in Swiss gold bullion exports.

Shift in Swiss Gold Bullion Exports Chart
It shows flows to key Asian markets falling almost to zero with never before seen shipment volumes into the US, reaching 111.7 tonnes in April.

In a London Bullion Market Association (LBMA) webinar last week, senior executives from three major precious metal secure carriers – Loomis, Malca Amit and Brink’s – said the flows into New York were “unprecedented” and “probably not far off the total amount of metal that's been mined in this period”.

The main driver of those flows to the US has been considerable demand for gold by traders of Comex futures contracts. Normally, the bidding up of Comex futures prices would be translated into the spot (immediate delivery) market but COVID-19 impacted the mechanism for keeping the two markets in alignment (known in the trade as “the EFP”).

New York and London prices diverged by up to $90 at one point, creating a profit opportunity for those capable of buying gold elsewhere at the lower spot price and shipping it into New York to sell at the higher futures price.

For more background on what the EFP is you can watch Nick discuss how it is priced, who trades it and its impact on gold prices in ABC Bullion’s 360 Monthly Review on YouTube.

Nick & Bron Youtube Pic
Contrast that demand with China, where a slump in domestic demand for gold has seen local prices trade as much as US$70 below international prices, resulting in China’s central bank simplifying procedures for companies exporting gold.

China is known as a one-way sink for gold and usually has strict controls on gold exports, requiring physical gold inventory certificates or gold production capacity certificates among other requirements before gold can leave the country.

Our view is that gold’s price performance to-date has been outstanding considering that it has not been underpinned by a constant bid from India and Asia.

Having talked about falling home prices, we’d like to close on a happy note for those that didn’t catch Monday’s 360 Market Wrap where Nick discussed Charlie Morris’ rational case for $7,370 gold by 2030.

While Nick sees that figure as an ambitious call, he agrees with Charlie’s methodology of modelling gold as a zero-coupon, long duration bond “issued by God”.

Charlie says that model “is telling us that higher inflation is coming” which will make bonds unattractive and possibly result in equity valuations falling. He says that “the last time we saw this was in the 1970s. Those that thrived owned gold”.

Until next time,
 
John Feeney and Bron Suchecki
ABC Bullion
 
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at comms@abcbullion.com.au, or call us during trading hours on 1300 361 261.

Disclaimer
This article has been prepared by Australian Bullion Company (NSW) Pty Limited (ABN 82 002 858 602) (ABC). The information contained in this article or internet related link (collectively, Document) is of a general nature and is provided for information purposes only. It is not intended to constitute advice, nor to influence any person in making a decision in relation to any precious metal or related product. To the extent that any advice is provided in this Document, it is general advice only and has been prepared without taking into account your objectives, financial situation or needs (your Personal Circumstances). Before acting on any such general advice, we recommend that you obtain professional advice and consider the appropriateness of the advice having regard to your Personal Circumstances. If the advice relates to the acquisition, or possible acquisition of any precious metal or related product, you should obtain independent professional advice before making any decision about whether to acquire it.

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